The Billion-Dollar Club
To be a member, focus on defense, homeland security, health IT, outsourcing as hot opportunities
- By Roseanne Gerin
- May 12, 2006
Ed Casey became CEO of Serco North America Inc. in January.
When Ed Casey became CEO of Serco North America Inc. in January, he knew he had a formidable task ahead of him. The Vienna, Va., company had spent the previous year integrating its March 2005 acquisition, Resource Consultants Inc., a company roughly the same size.
The focus for the first year was handling the name change and integrating accounting systems and other operations.
"A lot of the strategy and market issues were put on the side, awaiting the new CEO, so the challenge I faced coming in was, No. 1, to create a new strategy to grow the business," Casey said.
Serco Services Inc., which provides IT services to defense and civilian agencies, state and local governments and commercial customers, ranks at No. 52 on Washington Technology's 2006 Top 100 list of federal prime contractors in IT services with $185 million in prime IT contracting revenue.
Casey's goal is clear: Take Serco, which has overall revenue of $500 million, double it over the next three to four years, then map a plan to double it again.
"The North American market is one of the most important strategic and growth markets for Serco," Casey said.
Reaching the billion-dollar revenue mark is a common theme for many companies on the 2006 Top 100 list.
Compiled by Federal Sources Inc. of McLean, Va., the list ranks companies according to their prime contracting revenue, which is based on 117 product service codes selected by Washington Technology, (See "How we got our numbers.")
Thirteen companies at the top of the list already have more than $1 billion in annual prime contracting revenue. At the very top is Lockheed Martin Corp. of Bethesda, Md. ? No. 1 for the twelfth year in a row ? with $6.2 billion in prime IT revenue. Two more companies are less than $100 million shy of the $1 billion mark.
But no matter if a company is at, above or below that level, all are fighting to take home a bigger slice of the pie than they did last year. Success one year is no guarantee of success the next. To maintain their edge, companies are focusing on establish-
ed markets such as defense, intelligence and homeland security as growth engines for business, but they're also keeping an eye open for emerging opportunities in areas such as health care IT and outsourcing.
Merger and acquisition activity also is expected to remain high, executives said.
"There's no such thing as a permanent advantage," said J.P. "Jack" London, chairman, CEO and president of Arlington, Va.-based CACI International Inc., No. 13 with $1.1 billion in prime IT revenue.Where the dollars are
A growing market for many companies on the Top 100 is health care IT. Applications range from sharing health records to using advanced technologies to spot and track emerging health threats.
Improving the efficiency of Medicare and Medicaid systems will be an important opportunity, said James Krouse, acting director of public sector market analysis at Input Inc. of Reston, Va. The focus is on "reducing waste and abuse and improving the flow of information," he said.
The government market research firm estimates that federal health IT initiatives will total $169 million this year. Much of that will come through expansion of task orders, targeted grants and federal financial participation, which lets state governments access federal funds for administrative costs, such as Medicaid outreach programs. Electronic health records also will be a focal point, Krouse said.
In part to prepare for health care opportunities, Perot Systems Corp. (No. 44) of Plano, Texas, spent most of last year centralizing its fragmented business development organization to go after bigger government business, said James Ballard, president of Perot Systems Government Services. To push into the market, Perot formed a team of sales people from its health care and government practices, he said.
Accenture Ltd. of Hamilton, Bermuda, (No. 24) last spring bought Capgemini U.S.' 600-person North American health care practice for $175 million. It brought the number of Accenture professionals serving health and life sciences clients to more than 4,600.
Northrop Grumman Corp. of Los Angeles, No. 2 on the Top 100, in March 2005 acquired Integic Corp., a Chantilly, Va., company that specializes in enterprise health and business process management. The acquisition helped Northrop Grumman win the National Health Information Network contract, said James O'Neill, corporate vice president and president of Northrop Grumman IT. The company shares the $18.6 million contract with Accenture, Computer Sciences Corp. (No. 5) and IBM Corp. (No. 17).
The Health and Human Services Department contract will be used to develop prototypes for a nationwide health information network architecture that lets disparate systems exchange electronic health records.
Health care may be just gaining momentum, but billions are already being spent in areas such as defense, intelligence and homeland security. The latter, in particular, remains a fast-growing market.
From fiscal 2005 to fiscal 2007, spending on IT for homeland security is expected to show a compound annual growth rate of 19.6 percent, rising to $2.7 billion in 2007 from $1.9 billion in 2005, according to FSI's most recent analysis of the government IT market.
One of the biggest pending DHS opportunities this year is the $2 billion Secure Border Initiative-Net. Top 100 companies lead four of the five teams chasing it: Lockheed Martin, Northrop Grumman, Raytheon Co. (No. 6) and the Boeing Co. (No. 15). The fifth team is led by relative newcomer to the federal market, Ericsson Inc. of Plano, Texas, but its team includes CSC and L-3 Communications Inc. (No. 7) of New York.
Some companies also see more opportunities for IT outsourcing as increasing numbers of federal government employees retire, and agencies face budget shortfalls.
"As more and more federal workers retire, we believe there will be a demand for more managed services," said Robert Coleman, president and chief operating officer of ManTech International Inc. (No. 21) of Fairfax, Va.
The graying federal workforce, and the likelihood that it will spark more outsourcing, also has caught the eyes of CSC and other contractors.
Preparing to take advantage of the opportunities presented by the widespread retirement of government workers is a priority, said James Sheaffer, president of CSC's federal sector. The company's approach could entail small acquisitions, as well as partnering and alliances, to build out its skill sets, he said.More deals ahead
The appetite for acquisitions in the public sector market is seemingly endless. In the past two years, the government market has seen more than 200 acquisitions.
"In 2005, we looked at 125 deals, which is 30 percent more than in 2004," said Lucy Reilly Fitch, vice president of corporate development for BAE Systems Inc. (No. 11) of Rockville, Md.
Nearly every company that moved up the ranks of the Top 100 has made deals.
SI International Inc., for example, moved up nine spots to No. 40 this year, in part as a result of acquisitions it has made. The Reston, Va., company used acquisitions to expand its presence in the intelligence community and in the defense and homeland security markets.
SI's purchases include Zen Technology Inc. in March, Bridge Technology Corp. in December 2005, and Shenandoah Electronic Intelligence Inc. in February 2005. The company anticipates more acquisitions in the $30 million to $70 million range that can be integrated within 90 days, said S. Bradford Antle, president and CEO.
These companies will help SI expand business in federal IT systems modernization, homeland defense, mission-critical outsourcing and defense transformation.
A common strategy for companies making acquisitions is to look at which capabilities they need and which customers and markets they want to reach. Few, if any, are making acquisitions simply to add bulk.
"We will not be a serial acquirer, but we'll definitely look to make selective acquisitions where we can either fill a market gap or a capability gap," said Serco's Casey. It's unlikely that Serco will do any deals until 2007, he said.
Even McLean, Va.-based BearingPoint Inc. (No. 23), which had its hands full with accounting problems last year, is looking to make acquisitions in the $50 million to $100 million range to speed its entry into health care as well as homeland security, intelligence and systems integrations and systems engineering work, said Robin Lineberger, the federal services practice senior vice president.
To date, Arinc Inc. (No. 29) of Annapolis, Md., has relied on organic growth, but will consider small acquisitions of $10 million to $20 million in the future, depending on the availability of financing and new equity capital, said John Belcher, chairman and CEO.
One of the biggest deals of the year likely will be the completion of the acquisition of Anteon International Corp. (No. 12) of Fairfax, Va., by General Dynamics Corp. (No. 4) of Falls Church, Va. The deal could propel General Dynamics higher into the Top 5 next year.
With CSC also exploring a sale, look for more shake-ups among the Top 5, depending on who makes that deal.No easy road
As companies grow to the billion-dollar sales level and beyond, the pressure increases on them to pursue ever-larger contracts to maintain growth rates, executives said. The competition also gets tougher.
SRA International Inc. (No. 19) of Fairfax, Va., is tracking 32 projects worth more than $100 million each. While it wins 70 percent of the smaller contracts it chases, it expects the win rate on the larger ones to be 40 percent, said Renato DiPentima, president and CEO.
"We're extending our reach, going after tougher contracts," he said.
Perot is shifting away from an emphasis on chasing task orders. The company had to resell its services every six months to a year when orders came up for renewal, Ballard said. Instead, it is putting more effort into finding more long-term projects with annual or recurring revenue, he said.
But complicating the pursuit of new business for many companies is the challenge of finding qualified employees.
Northrop Grumman IT, for instance, has about 1,500 open positions, O'Neill said. The IT sector employs about 18,500 people.
In its federal government unit, Accenture has about 400 openings, many of which require security clearances. Some positions also require SAP America Inc. (No. 32) or Oracle Corp. (No. 76) enterprise resource planning software skills.
"The resourcing challenge is one of the greatest we faced" in 2005 and will continue to face in 2006 and beyond, said Lisa Mascolo, managing director of Accenture's U.S. government business.
Because government is facing a similar hiring pinch, it has a dearth of experienced contract managers. In the complex arena of government contracting, that lack of experience can hobble contractors and endanger programs.
"When you look at programs that succeed and fail, underneath the failures it's typically not a failure of technology," Mascolo said. "It's much more a failure of program management, because the challenge is to make sure, on the contractor side, that we have the right program management resources and, on the government side, that they have as highly experienced program managers as they can."
Some companies report that as the Defense Department's budgets tighten, the agency is taking longer to make purchases. MTC Technologies Inc. (No. 34) of Dayton, Ohio, anticipates bidding on larger contracts to compensate for the delays, said CEO David Gutridge.
"We have to bid more opportunities than we did before, just to wind up with the same amount of wins in a particular 12-month period," he said.
Staff Writer Roseanne Gerin can be reached at email@example.com.